Redirecting

Saturday, October 24, 2009

Don't Payze Me Bro

A story I didn't comment on this week was that of the "Pay Czar" Kenneth Feinberg, who is going to limit executive pay for the top 25 employees at the biggest TARP teat sucklers: BankAmerica, Citi, AIG, GM, GMAC, Chrysler and Chrysler Financial. Even for a free markets capitalist like me, it's hard to complain about this - I mean, these firms have received oodles of government cheese, and I dare say that all of them would be up a creek without a paddle if not for the generosity of the taxpayer. Hence, the public's anger gets appeased with this symbolic offering: you certainly won't see the CEO's of any of these firms receive hundred million dollar bonuses this year. One problem is that especially at BAC, C and AIG, the top 25 titular ranked employees may not be the highest earning ones.

Marla @ ZeroHedge had an interesting post a few days ago on the subject - which I found especially intriguing because her readership generally disagreed with her.

"Citizens of the United States do not need a "special master" to deliver them a spanking for losing money. Nor do they need a handout from government coffers. It's time for enterprise in the United States to leave the nest and forgo both the extra bedroom that Mom will keep just like you left it "in case," and the time out room Dad will send you to if you blow it again. Punishing firms that accepted government funds, effectively under duress, and who have managed to actually pay those funds back (at a gain to the taxpayer, you might also notice) is a dangerous act. It is a clear sign that political whim and "sensitivity to public outrage" is driving economic policy. Again, this will all end in tears."

I strongly agree that firms who paid the funds, which were given without foresight of potential consequences (like public outrage over GS's massive bonuses) cannot be held liable forever. Also, I think the government meddling in the compensation of employees at non-government owned firms is an atrocious idea. However, the 7 firms in this case are not your average companies - they are the top of the pyramid of government largess, and I think that with these 7 companies, it's hard to disagree with limited compensation. Marla notes that populist policies can never be a good trend, which I agree with wholeheartedly.

Marla also explains:
"The proper way to have dealt with executive pay (which is a tiny fraction of corporate cost in any event) would have been to permit these institutions to fail. Period. You might notice that no one needs to modify Dick Fuld's pay today."

I agree 100% with this - but what do we do now that the horse is out of the barn? That's why I find it hard to argue with restricting comp at the worst offending firms.

Yves at NakedCapitalism also attacked the topic:

"The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America. If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking."


I happen to very much disagree with that last sentence about ensuring that activities are "socially valuable." On the contrary - the key is to make sure that the activities are NOT socially DESTRUCTIVE. Those two conjectures are not equivalent. If the government is going to backstop an industry, like banking, it needs to make sure that none of the firms have the ability to take risks which have the ability to blow up our financial landscape. The government's job is NOT to make sure that banks are saving puppies and kittens and painting their offices in pretty pastel colors, or other "socially valuable" initiatives.


-KD

1 comment:

Daniel said...

Excuse me but how much did dick take out of Lehman before the implosion? He ain't hurting right now. In fact, his grandkids grandkids won't be hurting....